Table of Contents
This report gives a detailed account on a proposed establishment of a McDonald’s Franchise. The ownership type shall be Limited Liability Partnership Company, as opposed to the other suggested models i.e. sole proprietorship or corporation. The reasons for picking the LLC type of ownership will be given in details, with an account of the pros and cons of each and how the chosen ownership shall be of advantage to the establishment of this franchise.
Analysis of the sole proprietorship type of ownership
A sole proprietorship will involve the establishment of the business under single ownership. In this case, the owner will be personally responsible for all the profits as well as the losses that the business will generate (sos.wa.gov).
As in this case, which is a franchise, it is only after the franchise terms have been dealt with that the owner will be able to enjoy the benefits that come with such kind of ownership. The benefits being:
The owner will have an easy time preparing the financial books for the business. This is because there are not as many factors to consider unlike in a partnership, where the profits have to be shared among the owners.
Equally, tax preparation becomes simple, since the owner will only fill a single IRS form. Following up on it will also be simple. The mathematics is less complicated.
In a sole proprietorship, the owner is able to raise capital in his/her preferred method, be it public or private. He/she does not have to involve the employers that will be under his command. In addition, there is no involvement from investors (Aronoff et al.).
However, sole proprietorship has its fair share of cons. To begin with, in order to establish a McDonald’s franchise, one has to be having some $750,000 in order to be considered for training. Raising such an amount of money is no simple task. In addition, the money has to be cash on hand, vested profit sharing, real estate or business equity which does not include one’s personal residence (Aboutmcdonalds.com). It would therefore require one to choose an alternative type of ownership, hence LLC.
Secondly, while running a sole proprietorship, you are responsible for book keeping and paying of salaries. One becomes inclines to forego these tasks. It then becomes impossible to give a proper account of the finances, which may lead to a collapse of the business. Not only are the finances at risk of mismanagement, but other aspects of management too. McDonalds will require that you run your franchise with the mission, vision and values of the major organization in mind. If these are not followed to the latter, the ownership may be taken away (Aboutmcdonalds.com).
Thirdly, in sole proprietorship, the business is not necessarily a different entity from the owner. That means that in case of a liability, other property that belongs to the owner may be used to pay off the debts (sos.wa.gov).
Analysis of the corporation type of ownership
The establishment of a corporation involves formation of a legal entity that should have a distinct name. The business processes that the corporation will undertake can either be profit-based or non-profit depending on the preference of the owners. Corporations are allowed to have shareholders. These shareholders have the right to exercise their rights as stipulated in the incorporation regulations of the United States. They can transfer shares by means of buying and selling, and they are responsible for appointing the board of directors of the corporation (Brown, 2003).
In this case, establishing a McDonalds Corporation Franchise will be quire unreasonable. McDonalds is already a corporation that is fully formed. Forming a new one would require that one gets their own name and will no longer be buying the business idea from McDonalds.
In addition, the management of a corporation is quite hefty. One will need to build up enough profit and have proper books in order to attract shareholders to the corporation. It would also require the formation of other branches of the corporation in order to build on the market base. McDonalds franchising terms involve the selection of a spot where the franchise will be run by the franchisee. It is not the franchisee’s choice. They will in addition dictate a lot of terms, such as the quality standards that are expected, the decor, items on the menu, the control techniques of the inventory, the service and value, the signage plus a lot more (howstuffworks.com).
Formation of a corporation is also more expensive in comparison to the other forms of ownership. The corporation is a larger organization compared to sole proprietorships or partnerships. In the United States, the legal fees for forming a corporation are in hundreds of dollars. This will come in addition to the high fee that McDonalds requires one to have hand in cash before setting up the franchise (Aronoff et al.).
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Corporations operate as separate entities from the owners. This means that one will be required to file the business returns with the IRS (sos.wa.gov). To some, this will translate to additional work, considering one has to file their own tax returns too. Field observations indicate that managing a McDonalds franchise is not an easy business; some of the owners suffer from burn outs. Apart from the tax returns, the owner also has to ensure that the books and paperwork involving registration of the company are up to date. They have to ensure that their paperwork tallies with those of various registrars; the registrar of shares, the registrar of directors, the registrar of transfers, just to mention a few. This adds to the amount of work the owner has to ensure is done (sos.wa.gov).
With a corporation, one has to keep clean financial books. This implies that there often is less tax flexibility. In case of a loss, it must be carried forward until the business is able to generate enough income to cover for the losses. Keep in mind that the shareholders are always looking at the books to check whether they are investing in a worthy company. In addition, corporations do not receive tax credits. This means that every penny is taxable. The business is not able to enjoy credits like individuals do enjoy.
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The allure of limited liability that corporations come with could not be practical when one is establishing a McDonald’s shop. This is because given that McDonalds has already established itself as a company, it will be difficult for a franchise to get corporation credit. When one factors in the high registration costs that come with corporations and the fee that McDonalds requires from the franchisee, it may require the owner to secure a loan elsewhere. Loans require collaterals. The owner may then be required to have their personal wealth as guarantees and end up not enjoying the advantage of limited liability that comes with corporations (Brown, 2003).
The advantages that come with the corporation form of ownership as alluded above include limited liability; it is much simpler to finance, since the shareholders will chip in-the implication is that the business is able to grow; and tax deferral-corporations are allowed to defer the payment of taxes to a future time (Brown, 2003).
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Analysis of the LLC partnership type of ownership
An LLC partnership ownership that which this document defends as the preferred form of ownership for the McDonalds franchise is one which combines some attributes of a corporation and that of a partnership. Here, the company enjoys limited liability where the business is a separate entity from an individual; and the financial liability that an individual holds towards a company only extend to the individual’s investment in the company (Aronoff et al.). While an LLC can also be a sole proprietorship that of partnership has been chosen as the preferred form due to the reasons and disadvandages earlier discussed.
The advantages that a limited liability partnership has include starting capital will be easy to come up with, since each member of the partnership will be required to give a fraction of money for investment in order to start the company. Limited liability is definitely an advantage that the company will enjoy
In an LLC partnership, the ratio of initial contribution doesn’t always translate to the ratio in which the returns will be shared; a different basis of distribution can be decided upon by the members. This way the owners can concentrate on profit-making.
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An LLC partnership is less hefty compared to a corporation in that the paperwork is less involving. This way the owners can concentrate on profit-making. The company is allowed to choose what kind of taxation it will be subject to. If they choose S corporation, it will enjoy pass through taxation, which means the members will not have to go through double taxation (Aronoff et al.).
The disadvantages that come with such type of an ownership include that in case the company requires going public, investor will prefer corporations. Such a case is unlikely since this is a franchise, and McDonalds requires that one has cash in hand before they allow you to start the business (Aronoff et al. & Brown, 2003)
The other down-side is taxation that comes with limited liability companies. Some states such as Maryland, District of Columbia, Alabama and California are taxing companies on the basis of them being limited liability companies (sos.wa.gov). This is not likely to be a major constraint given the many advantages that the company will be enjoying.